AGILEVC My idle thoughts on tech startups

Microsoft, Near Death, & Enterprise Cloud

September 3, 2013

We all woke up to the news that Microsoft is buying Nokia for ~$7B (ok, not the carrier infrastructure biz but the main part of Nokia that anybody cares about). This isn’t totally out of left field since they’ve had a close partnership for a year, but I tweeted my reaction:

What Microsoft needs is a near death experience so that they can reinvent themselves as an enterprise cloud company. Big tech has long had a history of phoenixes rising from the ashes… think near death of Apple which in the long run came to dominate mobile computing, or IBM which went from a dying “Big Blue” to todays “THINK” which dominates tech services and much server-side computing. And there are plenty of non-tech companies whose near death experiences catalyzed remarkable transformations (Ford under Alan Mulally, Continental Airlines under Gordon Bethune, et al).

In the late ’90s Microsoft was the world’s most valuable company and dominated virtually every category of software that mattered, and even some that didn’t matter that much (e.g. browsers). To be fair to Microsoft they’ve done some laudable things in the past decade like creating a respectable (still distant #2) search company in Bing, being both dominant and innovative in console gaming (Kinnect, Xbox Live, etc), and acquiring some interesting companies (Skype, Yammer). And Microsoft’s Azure strategy has given it a strong position in public and private cloud computing.

But the company has fundamentally been playing catch up for most of the Ballmer era, and arguably has done a mediocre job of it. While I’m sure Hollywood would love a story like “Bill Gates returns to Microsoft and makes it into a radical innovator”, that’s simply not going to happen. And the reality is that Microsoft isn’t exactly near death, with healthy profits and cash-flow from Windows, Office, and cloud services. MSFT has more billion dollar software franchises than you can shake a stick at (Dynamics in SMB CRM, Sharepoint, etc).

As interesting as Bing, Xbox, Skype, and other consumer services may be they don’t make much money. And the consumer hardware businesses (Surface, Windows phone) have flopped big time. Doubling down on consumer hardware with Nokia seems like a terrible idea to me… MSFT will continue to struggle in these categories and not make much money in them. It would probably take a near-death experience for Microsoft to realize that being awesome in something is better than being mediocre in everything. The path to being awesome in something would look roughly like this.

1) Hire transformative CEO to replace Ballmer. This seems like a no-brainer but Ballmer and the MSFT board might lean towards a less risky path. Names like Stephen Elop of Nokia, John Donahue of eBay, and internal candidates (Satya Nadella, Steven Sinofsky, et al) are mentioned. Microsoft is an enormous ship and reinventing the company would be non-trivial for anyone, so I don’t think the choice is an obvious one. Remember Lou Gerstner ran American Express before taking the helm at IBM in 1993. But all the other phoenix-risen stories above are intrinsically linked to a strong leader willing not only to take the riskier strategic path but also willing to persuade and cajole a large organization that path was necessary.

2) Divest the consumer facing businesses in mobile hardware, gaming, and online services. Xbox could probably be a pretty good standalone business but MSFT will never be a leader in phones, tablets, or search. Microsoft doesn’t need the cash… despite limited growth and paying a substantial dividend, MSFT still generates good cashflow and has >$70B on it’s balance sheet. But the company does need to become more focused in its strategy, operations, and personnel.

3) Triple down on cloud infrastructure & services with Azure and acquisitions. At the 90,000 foot level platforms matter if you want to be in the end-user device business. But the next 10+ years of computing can be roughly described as cloud + pipes + device platforms. Apple, Google, and Samsung are winning in the latter but Microsoft can dominate the former as a software and service “platform” for enterprises and infrastructure providers.

And I specifically mean cloud infrastructure rather than the application layer. It would be silly for Microsoft to buy a bunch of SaaS companies to compete against Oracle and SAP. Microsoft already has a dominant position from server OS to private/public cloud services so they should build on that that organically and through acquisition. Want names? Small ball would be acquisitions of companies which help manage and power cloud applications and there’s lots to choose from here: stodgy old guys like BMC to recently public ServiceNow or Splunk to privately held startups (MongoDB, et al). The transformative play would be for VMWare, which would probably require buying EMC at the same time (divest the storage hardware but keep storage software, RSA, etc). A bunch of people smarter than me about enterprise cloud could probably gin up even more names than I did in thinking about this for 60 seconds.

FWIW, I don’t predict this will happen. I think Microsoft will continue to lead in a few areas but muddle along in so many more. I suspect they’ll pick a smart and competent replacement for Ballmer, but not one who will transform by shrinking then re-focusing and growing again as an enterprise cloud world-beater. I’m rooting for Microsoft and you never know…